The Great Housing Boom of China

This paper provides a theory to explain the paradoxical features of the great housing
boom in China —the persistently faster-than-GDP housing price growth, exceptionally
high capital returns, and excessive vacancy rates. The expectation that high capital
returns driven mainly by resource reallocation are not sustainable in the long run
can induce the very productive entrepreneurs to speculate in housing during economic
transition. This creates a self-fulfilling growing housing bubble, which can create severe
resource misallocation. A calibrated version of the theory accounts quantitatively for
both the growth dynamics of house prices and other salient features of the recent
Chinese experience.